Gore
Range Carpet Cleaning is a family-owned business in Eagle-Vail,
Colorado. For its services, the company has always charged a flat fee
per hundred square feet of carpet cleaned. The current fee is $23.45 per
hundred square feet. However, there is some question about whether the
company is actually making any money on jobs for some
customers—particularly those located on more remote ranches that require
considerable travel time. The owner’s daughter, home for the summer
from college, has suggested investigating this question using
activity-based costing. After some discussion, a simple system
consisting of four activity cost pools seemed to be adequate. The
activity cost pools and their activity measures appear below:
| Activity Cost Pool | Activity Measure | Activity for the Year |
| Cleaning carpets | Square feet cleaned (00s) | 12,000 | hundred square feet |
| Travel to jobs | Miles driven | 130,500 | miles |
| Job support | Number of jobs | 2,000 | jobs |
Other (organization-sustaining
and idle capacity costs) | None | Not applicable |
|
|
The total cost of operating the company for the year is $350,000, which includes the following costs:
|
| | | |
| Wages | $ | 140,000 |
| Cleaning supplies | | 26,000 |
| Cleaning equipment depreciation | | 7,000 |
| Vehicle expenses | | 38,000 |
| Office expenses | | 62,000 |
| President’s compensation | | 77,000 |
| |
|
|
| Total cost | $ | 350,000 |
| |
|
|
|
|
Resource consumption is distributed across the activities as follows:
|
| |
Distribution of Resource Consumption Across Activities
|
| | Cleaning Carpets | Travel to Jobs | Job Support | Other | Total |
| Wages | 78 | % | 14 | % | 0 | % | 8 | % | 100 | % |
| Cleaning supplies | 100 | % | 0 | % | 0 | % | 0 | % | 100 | % |
| Cleaning equipment depreciation | 74 | % | 0 | % | 0 | % | 26 | % | 100 | % |
| Vehicle expenses | 0 | % | 80 | % | 0 | % | 20 | % | 100 | % |
| Office expenses | 0 | % | 0 | % | 55 | % | 45 | % | 100 | % |
| President’s compensation | 0 | % | 0 | % | 29 | % | 71 | % | 100 | % |
|
| Job
support consists of receiving calls from potential customers at the
home office, scheduling jobs, billing, resolving issues, and so on. |
| 1. |
Prepare the first-stage allocation of costs to the activity cost pools. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)
|
| 2. | Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places. Omit the "$" sign in your response.) |
| 3. |
The
company recently completed a 4 hundred square-foot carpet-cleaning job
at the Lazy Bee Ranch—a 55.00-mile round-trip from the company’s offices
in Eagle-Vail. Compute the cost of this job using the activity-based
costing system. (Round your intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)
|
| 4. |
The
revenue from the Lazy Bee Ranch was $93.80 (4 hundred square-feet at
$23.45 per hundred square feet). Prepare a report showing the margin
from this job. (Input all amounts as
positive values except losses which should be indicated by a minus sign.
Round your intermediate and final answers to 2 decimal places. Omit the
"$" sign in your response.)
|
Explanation: 1.
| The first-stage allocation of costs to activity cost pools appears below: |
| Wages: |
| Cleaning Carpets = 78% × $140,000 = $109,200 |
| Travel to Jobs = 14% × $140,000 = $19,600 |
| Job Support = 0% × $140,000 = $0 |
Other = 8% × $140,000= $11,200
|
| Cleaning supplies: |
| Cleaning Carpets = 100% × $26,000 = $26,000 |
| Travel to Jobs = 0% × $26,000 = $0 |
| Job Support = 0% × $26,000 = $0 |
Other = 0% × $26,000 = $0
|
| Cleaning equipment depreciation: |
| Cleaning Carpets = 74% × $7,000 = $5,180 |
| Travel to Jobs = 0% × $7,000 = $0 |
| Job Support= 0% × $7,000 = $0 |
Other = 26% × $7,000 = $1,820
|
| Vehicle expenses: |
| Cleaning Carpets = 0% × $38,000 = $0 |
| Travel to Jobs = 80% × $38,000 = $30,400 |
| Job Support = 0% × $38,000 = $0 |
Other = 20% × $38,000 = $7,600
|
| Office expenses: |
| Cleaning Carpets = 0% × $62,000 = $0 |
| Travel to Jobs = 0% × $62,000 = $0 |
| Job Support = 55% × $62,000 = $34,100 |
Other = 45% × $62,000 = $27,900
|
| President's compensation: |
| Cleaning Carpets = 0% × $77,000 = $0 |
| Travel to Jobs = 0% × $77,000 = $0 |
| Job Support = 29% × $77,000 = $22,330 |
| Other = 71% × $77,000 = $54,670 |
2.
| The activity rates are computed as follows: |
| Activity Cost Pool | (a)
Total Cost | (b)
Total Activity | (a) ÷ (b)
Activity Rate |
| Cleaning carpets | $ | 140,380 | 12,000 | hundred square feet | $ | 11.7 | per hundred square feet |
| Travel to jobs | $ | 50,000 | 130,500 | miles | $ | 0.38 | per mile | |
| Job support | $ | 56,430 | 2,000 | jobs | $ | 28.22 | per job |
|
3.
| The cost for the Lazy Bee Ranch job is computed as follows: |
| Activity Cost Pool | (a)
Activity Rate | (b)
Activity | (a) × (b)
ABC Cost |
| Cleaning carpets | $ | 11.7 | per hundred square feet | 4 | hundred square feet | $ | 46.8 |
| Travel to jobs | $ | 0.38 | per mile | 55 | miles | | 20.9 |
| Job support | $ | 28.22 | per job | 1 | job | | 28.22 |
| | | | | | |
|
|
| Total | | | | | | $ | 95.92 |
